Owner of single member llc paid himself on payroll and issued w2. is this ok? If not OK, how is this best corrected?

[TaxGuyBill]

You post indicates you are using TurboTax "Business", which is for Corporations and Partnerships.  Is that correct?

Has your Single Member LLC filed the form to make the election to be taxed as a Corporation?

[robert-1875]

No. The LLC was created and started operation in 2017.

[TaxGuyBill]

Then as Helena said, you need to correct/cancel the W-2/W-3 and all of the associated payroll forms.

You can use either the "Self Employed" Online version, or better yet, any of the CD/downloaded versions (the "Home & Business" version may give you more guidance).

[HelenaC · Accepted solution]

No, a Single Member LLC cannot issue themselves a W-2. An individual owner of a single-member LLC that operates a trade or business is subject to the tax on net earnings from self employment in the same manner as a sole proprietorship. You are not allowed to deduct wages you pay yourself. Net earnings are reported on Form 1040 Schedule C, Profit or Loss from Business (Sole Proprietorship) .

You must amend your Payroll Tax Returns to reverse your payroll. For additional information, click on Correcting Employment Taxes | Internal Revenue Service - IRS.gov. 

.

[Accountantmom]

What happens if the single member LLC filed taxes with the W-2 - meaning this was and error for 2018? Can the the 941s be amended and a corrected 2018 W-2 be completed to show wages in box 1 as zero? I am assuming a corrected W-2 would be necessary to correct their 2018 individual tax return?! Thanks!

[tagteam]

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@Accountantmom wrote:

 I am assuming a corrected W-2 would be necessary to correct their 2018 individual tax return?!

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Yes, you can prepare and file a corrected form W-2 and 941-X (and/or an amended 940). 

[BLafleur]

Not a reply, but a related question......

A single member LLC (daycare) is owned by single member LLC (Properties). (Basically the same person owns both businesses, but on paper Properties, LLC owns Daycare, LLC) Can the owner of Properties, LLC be paid a W2 wages by the Daycare, LLC?

[Carl]

An LLC be it single member or multi-member is considered to be a disregarded entity by the IRS. Under no circumstances and with no exceptions can an LLC issue the owner(s) of that LLC a tax reporting document of any type. There are no exceptions.

Now what makes your post unclear is that you "say" you have a single member LLC. However, you have indicated that you are using TurboTax Business (different from Home & Business.) TurboTax Business flat out can not be used to file a tax return for a single member LLC. Period. So either you incorrectly indicated what flavor of TurboTax you are using, or you filed the appropriate forms with the IRS to have your single member LLC "treated like an S-Corp" (or C_Corp) for tax purposes only.  *THIS MATTERS* big time, because the owner of a corporation "can" be a W-2 employee of that corporation, be it an S-Corp or a C-Corp.

So you may need to provide some clarity here to confirm that the information you are being provided is correct for your specific and explicit situation.

[BLafleur]

Carl, Turbotax is not being used at all here.

Both LLC's are Single member and are not treated as a corp.

Lady owns single member LLC, Properties, LLC. Properties, LLC owns single member Daycare, LLC.

Can Daycare LLC pay Lady W-2 wages?

[AmyC]

A single member LLC is a legal entity with a choice of tax filing between: 1) a disregarded non-entity filing a schedule C on their personal tax return or 2) requesting to be taxed as an S Corp. If you are an S corp, you are to be paid with a w2 and you did the right things. If you are not an S corp, then you do not pay yourself with a w2.

From this point, you can either file the from 8832 requesting to be an S corp or you can reverse all the payroll. The IRS has a business center which explains the business structures. You may want to look at the IRS structures by clicking the blue words.

[tagteam]

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@BLafleur wrote:

Lady owns single member LLC, Properties, LLC. Properties, LLC owns single member Daycare, LLC.

Can Daycare LLC pay Lady W-2 wages?

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No. Daycare, LLC is essentially a subsidiary of Properties, LLC but both would be considered to be disregarded entities for federal income tax purposes as a result of having one, and the same, owner (in the absence of an election to be taxed as a corporation).

[Danielschwartz7]

Hello all! Thank you everybody for all the great insight. 

I want to verify whether everything written here would also apply to a multi-member LLC that elects to be treated as a partnership? If an owner of a multi-member LLC has received W-2 income from that LLC on a prior tax return, how should this be addressed? Thank you all for your help!

[ThomasM125]

It's not necessary for a partner to receive a W-2 form, since that individual can pay in his or her own social security tax when filing their personal tax return, but you can issue a W-2 if you want to.

[lychen2005]

Are you able to elaborate if a single member LLC (which you said can not issue W2) can contribute to a 401K solo plan based on IRS guideline of self-employed earn income?  The below sentence from IRS website seems to indicate I can pay myself for the retirement fund contribution, and is before tax.     

elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit:

• $19,500 in 2020, or $26,000 in 2020 if age 50 or over ($19,000 in 2019, or $25,000 in 2019 if age 50 or over)